So what’s fair in work and pay?

This opinion article by Business Council chief economist Adam Boyton was published in the Australian Financial Review on 18 October 2018.

Australians have a strong concept of fairness. It shapes much of our dialogue, from sport to policy.

Few things cut to fairness in an economy as quickly as the labour market. Do people have jobs? Is pay fair?

This week sees the release of the labour force data from the ABS. As usual there will be intense focus on the monthly movements, despite the noise in them.

Part of the way to avoid the noise is to take a longer-term perspective. Doing so also helps us put the numbers into some context. Against the 40 years of the monthly labour force survey, how good is a 5.3 per cent unemployment rate?

Only during the peak of the mining boom did we manage to achieve a lower unemployment rate. And from 1978 to 2003 Australia never managed to print a 5.3 per cent jobless rate.

Of course, we can always do better when it comes to the labour market. Wages growth comes to mind. The most oft-cited measure of wages growth – the wage price index – has been running around record low levels and barely above the pace of headline inflation. The political economy of this is quite stark.

Over the past year the Australian economy created 300,000 new jobs. There are, however, over 12 million employed people in Australia. So while the creation of 300,000 jobs is impressive and worth celebration, our national mood is going to be dominated by the wages outcomes of the 12 million.

Our national mood is also going to be impacted by notions of fairness. But fairness isn't advanced by nonsense comparisons. Nor is the policy debate.

Take for example the comparison between wages and profits. Profits are up 8.8 per cent over the past year but wages are only up 2.1 per cent. Surely something must be wrong? Actually, no.

Profits are more volatile than wages. They always have been. That's true in both upturns and downturns. Or as economists say, wages are sticky downwards. Profits can be anything but sticky downwards.

Some examples make the point.

During the middle of the GFC profits fell 8.3 per cent over the year to September 2009. And wages? They grew by 3.1 per cent over the same period. In the post-Olympics slowdown company profits fell by 4.3 per cent over the year to June 2001. Wages growth ran at 3.7 per cent.

Profits have fallen four times on a yearly basis over the past 20 years. The wage price index hasn't. This is, of course, a good thing. We wouldn't want wages to be as volatile as profits.

And let's not forget that for the household sector as a whole, employment growth is significantly adding to incomes growth. But that's not to say we shouldn't aspire to faster wages growth. Faster real wages growth is how to increase living standards over time. But it is a question of how to deliver that. Delinking wages growth from productivity growth isn't the answer.

As the governor of the Reserve Bank put it recently: "The best outcome is one in which a pick-up in wages growth is accompanied by stronger growth in labour productivity. That's because, ultimately, the basis for sustained growth in real wages is that we become more productive as a nation."

But some will still try. And are trying to tear up the enterprise bargaining system that linked wages and productivity at an individual firm level. So what happens if we delink the two?

Not only does it make employment less secure, it will also have a significant impact on those on the edges of the labour market. It is those on the edges of the jobs market, and those trying to break into jobs, that typically end up bearing the brunt of labour market policy missteps and slowdowns.

Young people are a classic case in point.

It was younger workers that bore the brunt of the labour market weakness during the GFC. And as the Federal Department of Industry noted last year it is young people that have the most to gain from a more flexible labour market.

That also means if you make the labour market less flexible, by delinking wages and productivity for example, then it is young people that take a disproportionate hit. Which underscores just how unfair delinking wages and productivity could be.

It would be those trying to break into the jobs market and get a start in life that would take some of the biggest hits. Making it harder for young people to get that first job is anything but fair.